Japan's Economy Shows Limits of Keynesian Policies

Daryl Montgomery submits: Second quarter GDP figures show that the Japanese economy has fallen behind China's and is now only the third largest in the world. Japan has engaged in 20 years of massive government stimulus programs and kept interest rates low, but this has failed to reignite GDP growth. Instead, its economy continues to slowly sink.In the 1980s, Japan was an unstoppable economic juggernaut that everyone feared. It all ended when a spectacular stock market and real estate bubble blew up in the early 1990s. These bubbles were the ultimate outcome of excessive stimulus over many decades. Initially, that stimulus acted to revive the Japanese economy from the ruins of World War II. In the end, huge asset bubbles resulted. These collapsed throughout the 1990s and the first decade of the 2000s. One government stimulus program after another during that time only had temporary impact on the economy. As soon as the stimulus ended, economic growth disappeared. The U.S. is currently finding itself in the same situation. Complete Story »

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Submitted by Daniel Stelter via The Globalist blog, Following the start of Abenomics in 2012, Japan moved back to the center of attention of global financial markets. After two and a half decades of economic stagnation, hopes were high that Japan would escape its long stagnation and deflation.

Daryl Montgomery submits: In what is being billed as a surprise move, the Bank of Japan lowered interest rates back to zero and is planning on more quantitative easing. Along with an unending number of stimulus programs in the last twenty years, Japan has done it all before. If these economic policies actually worked, it wouldn't have to be doing them again. U.S. policy makers are following Japan's lead.

Daryl Montgomery submits: The Nikkei closed at 8995 last night, 77% below its final price in December 1989. The rising value of the yen is what is causing the stock market drop. The yen just hit a 15-year high against the dollar and 9-year high against the euro. A richly valued yen is a big negative for Japan's export-based economy.

Excerpted from Prem Watsa's Fairfax Financial Holdings investor letter, There is a monstrous real estate and construction bubble in China, which could burst anytime. It almost did in 2011 but China increased its credit growth significantly since then. In the last few years we have discussed the huge real estate bubble in China. In case you continue to be a skeptic, here are a few observations from Anne Stevenson Yang, an American who has been in China for over 20 years and is the founder of JCapital Research in Beijing:

This post Japan’s (Third) Lost Decade appeared first on Daily Reckoning.
In the early 2000s, the phrase “lost decade” began to be applied to Japan’s economic performance over the course of the 1990s. The lost decade started with the popping of one of the greatest stock market bubbles in history.

The Liberal government’s case for additional spending may get a boost if fourth quarter GDP comes in worse than expected on Tuesday.
It appears that GDP rose by a paltry 0.3 per cent for 2015 as a whole, which would mark the weakest 12-month gain since the final quarter of 2009.
“The issue is whether the economy slightly expanded or contracted in the final quarter of last year,” said Derek Holt, an economist at Scotiabank, in a note. “Q4 GDP could increase pressure on Ottawa to add stimulus on March 22nd when the Federal budget lands.”

Tokyo (AFP) - Japan's factory output fell by a less-than-expected 0.3 percent in March, data showed Thursday, but the still-weak statistics underscored an uncertain recovery in the world's number three economy.

This year has seen a decline in the growth of the Chinese economy, a cause that analysts believe to be the main driver of 2015’s global economic slowdown. The world’s largest economy’s GDP growth rate has declined to 6.9% according to the most recent quarter’s reports.
Among the reasons given for the weaker growth are disappointing trade and manufacturing. China’s manufacturing activity has hit a 3-year low while Japan’s is rising at the fastest pace since over a year.

I would like readers to consider carefully the fundamental difference between a “real economy” and a “financial economy.” In a real economy, the debt and equity markets as a percentage of GDP are small and are principally designed to channel savings into investments.